The Green Investor Update – May 19, 2011

On May 19, 2011, in Alternative Energy Stocks, Commodities, Solar, TGI Updates, by Andreas Schreyer
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In this update:

  • Solar market showing signs of growing up
  • A challenging macro environment
  • Commodities and energy sectors letting off some steam
  • The Green Portfolio update and recommendations

Solar market showing signs of growing up
But solar stock investors are not. The solar photovoltaic (PV) market is well known for its immaturity which has led to brutal boom and bust cycles. Many investors want to dabble in solar stocks to benefit from the tremendous growth rates the industry features, but expect the levels of stability and predictability of established mature markets. The same metrics often do not apply.

Analysts and the media focus on the big news, such as solar subsidy cuts in key European markets, which sends uninformed investors rushing in or out of their positions. As we wrote in the recent post “Sunset in Italy“, “We expect the global market to adapt well to changes in individual markets and for other countries to mostly pick up the Italian slack. For example, after a disastrous 2010, the U.S. is set to double new solar installed capacity this year, without any feed-in tariffs! Asian markets have been booming, with China, India and Japan all expected to have a record year.”

The solar market is not about Italy in 2011 but what will occur globally over the next 5 to 10 years as solar energy becomes cost competitive and mainstream.

The solar market might have evolved into adolescence but we do not expect the growing pains to stop anytime soon as it has many years to go till full maturity. What interests us is that we are entering a steeper growth phase in which manufacturing volumes are moving from niche to mass markets, economies of scale and efficiencies drive costs down, allowing prices of solar energy to move ever closer to grid parity.

The winning companies are managing to profitably grow their global footprint and dramatically expand their manufacturing capacity, all while cutting costs, prices and margins. The number of players will shrink as the losers go bankrupt, and the smaller companies with superior technology get acquired by the ultimate winners.

Our solar stock picks have already contributed more profits to our portfolio than any other sector.

A challenging macro environment
Earnings reporting season is in full swing and, with some 93% of the S&P 500 companies having reported 1Q earnings, nearly 70% beat analyst estimates. The estimated earnings growth rate for the S&P 500 for the second quarter and full year 2011 remains healthy. These statistics are pretty much mirrored in our portfolio companies with the majority beating estimates and reaffirming their 2011 guidance.

The global economic picture remains a major concern though. European sovereign debt issues won’t go away and are causing a shifting regulatory environment. Japan officially entered a second dip recession, now feared for other Western economies.

The U.S. hit the debt ceiling to set up another round of partisan bickering in Washington. Just this week, the political stalemate was demonstrated by the Senate when Republicans defeated a bill seeking to eliminate an estimated $21 billion in tax breaks for big oil companies to help pay off the Federal deficit, only to have Democrats return the favor by rejecting a bill to expand offshore oil and gas drilling in U.S. coastal waters.

Many markets appeared to correct from overextended situations. The U.S. Dollar rebounded strongly after dropping to near record lows. A higher Dollar is never good for the stock market which, after setting new bull market highs at the end of April, pulled back sharply in May. With a 1.37% gain in the last month, the S&P 500 index has been essentially flat.

Commodities and energy sectors letting off some steam
With most commodities priced in U.S. Dollars, the currency’s rebound triggered a sharp sell-off. Sweet crude oil dropped by over 12% since early May while natural gas lost 11%. Silver saw the largest swing with a 26% plunge so far this month.

For the last 30 days, energy stocks were one of the worst sectors.

Still, as we enter the summer season when global oil demand typically increases, most analysts expect energy prices to stop their decline and head back up sooner rather than later.

The Green Portfolio update and recommendations
With softness in the broad stock market and energy shares correcting, our portfolio held up well with a 1.03% decline in the month since our last update against a 4.09% loss for our industry’s benchmark, the S&P Global Clean Energy index.

As nervous investors moved to a risk avoidance mode, it is no surprise that the electric utilities in the portfolio, our conservative safety bastion, are holding-up the best with an average return of 4.91% for the month. Once again, battered wind energy stocks brought up the rear, with an average loss of 7.59%.

On the bright side, the two top performing stocks in the portfolio since our last update through the end of last week were both from the solar sector and they each gained over 17%. One of them, Power-One (PWER), has been featured here in the past, sometimes for its high degree of volatility, but mostly because of its stellar performance. The company has rapidly grown to become the second largest global supplier of power conversion and control electronics for the solar industry, demonstrating how innovation can keep U.S. companies competitive in world markets. Our Power-One investments have already netted us 221% and 314% over the last couple of years and we believe there is a lot more to come.

The second top performer this month, another U.S.-based company and leading provider of manufacturing equipment for the solar PV and LED industries, was only added to the portfolio in early March when it reached our recommended buy point. On top of last month’ 17.23% gain, the shares are up another 8.72% since last Friday on the news of a string of new orders, including their largest ever, $228 million from a large South Korean polysilicon producer. Since the beginning of 2011, the company has announced orders for over $828 million for their polysilicon equipment, sapphire furnaces and silicon ingot production systems which adds to a growing backlog and nicely shores up revenue projections for the next couple of years.

Despite these two high-flyers, the solar holdings in the portfolio returned only 1.90% in the month due to weakness in the shares of PV panel makers which suffered the short-term impact of European subsidy cuts.

Since inception The Green Portfolio has gained 30.37% while the S&P Global Clean Energy index is down 26.98% over the same period.

** Stop guessing. Get immediate access to all Green Portfolio positions and recommendations with a no-risk 30-day trial. You’ll love our green stock picks! **

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Sunset in Italy

On May 10, 2011, in Alternative Energy Stocks, Solar, The Green Portfolio, by Andreas Schreyer
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Sounds romantic, but it’s not. The Italian ministers for environment and industry have signed a much awaited decree which reduces the country’s generous solar incentives. The document is long overdue but came with the surprise of deeper cuts than in previous drafts. More importantly, the decree does not respect investments under way (any installations not complete and connected to the grid by the end of June 2011 are no longer eligible) and continues the uncertainty with a new registry mechanism for big plants which does not guarantee the subsidies.

The kneejerk reaction by analysts and investors is that the actions in Italy will kill the solar market, mostly the same crowd that was trumpeting unrealistically high forecasts for the Italian market not so long ago. We begged to differ then and we beg to differ now.

First of all, nothing is simple in Italian politics. The decree first has to be published in the “Official Gazette” to become law, and could still be vetoed by the President. As you would expect, the Italian solar industry is outraged and investors in the Italian solar power market have already filed law suits against the Italian state to cover damages expected from the regulatory changes. The decree as signed last week is highly unlikely to get implemented in its current version.

A little history will help understand all the hoopla surrounding the Italian solar regulations. As recently as 2008, Italy was not a large solar market and did not rank among the top five. While large European solar markets like Spain and Germany collapsed in 2008, hit by a combination of over capacity, reduced government incentives and the onset of the worst global recession in a century, Italy was busy enacting favorable solar subsidies which triggered a rush to build large power plants. The incentives propelled Italy to become the second largest solar market in a little over two years.

Just in January of this year the Italian Energy Agency (GSE) was crowing about new solar capacity added during 2010 reaching 1.850 MWs (up 62% from 1142 MWs at the end of 2009). There have been some wild forecasts for the Italian solar market in 2011, all the way to some 6,000 MWs, but we tend to side with more conservative estimates, such as Ardour Capital Investments which places Italy at some 11.8% of the world market, or about 2,000 GWs.

Italy appears to be late for the party. Spain, which used to have outrageous incentives and had become the largest solar market in the world, totally mismanaged their incentive plans and killed off the local solar market. France had embarked on incentive plans which rapidly became over-subscribed and had to be curbed. Germany, still the world’s largest solar market (and it’s not because of the abundance of sunshine) appears to be managing their solar incentives reductions the best, gradually and without destroying their industry.

Italy still has the option to follow either scenario, but even if the Italian ministers’ ruling stands the legal, industry and political challenges it faces, it will not affect feed-in tariffs (FITs) for rooftop installations under 1 MW or ground installations smaller than 200 kilowatts. It would certainly reduce the number of large utility-scale installations but in most European markets much of the growth is expected to come from smaller distributed installations.

Another way of looking at what the market is actually doing is through earnings reports from solar companies. Of the major solar panel manufacturers Trina Solar (NYSE: TSL) is the only one so far to revise their outlook downward for the quarter ended in March directly as a result of Italy’s solar regulatory revisions. But they reaffirmed their 2011 view. Another company with an important presence in Italy, First Solar (Nasdaq: FSLR), reported solid results that beat expectations last week and reiterated their 2011 guidance.

As it supplies most solar panel manufacturers with encapsulants, the film that protects the semiconductor material in solar cells and panels, STR Holdings (NYSE: STRI) can be seen as somewhat of a bellwether for the solar industry. Just last week STR reported sales and earnings for the first quarter which exceeded analyst expectations, and the company reaffirmed its full-year 2011 guidance.

In conclusion, the sky is not falling. Yes, ill conceived government subsidies have created a series of bubbles and bust cycles in several countries, but overall, solar energy costs have been falling much faster than subsidies. We expect the global market to adapt well to changes in individual markets and for other countries to mostly pick up the Italian slack. For example, after a disastrous 2010, the U.S. is set to double new solar installed capacity this year, without any feed-in tariffs! Asian markets have been booming, with China, India and Japan all expected to have record year.

We believe that winning solar companies in our Green Portfolio like the ones above have been diversifying geographically to insulate themselves from issues in any one market and will continue to deliver superior revenue and earnings growth

The solar industry, with an average P/E of 11.4 (and an even lower 4.9 for Chinese solar stocks) is near record low valuation levels and offers many bargains we cannot ignore.

** Stop guessing. Get immediate access to all Green Portfolio positions and recommendations with a no-risk 30-day trial. You’ll love our green stock picks! **

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